Pharmacy Benefits

Why Use NADAC-Based Pricing Over AWP

October 3, 2022

Josh Golden, SVP, Strategy

Average Wholesale Price (AWP) Is Broken

It’s high time we acknowledge the truth. AWP, the sacrosanct index that dictates drug prices for virtually all self-insured benefit plan sponsors in the United States, is broken. After years of manipulation and runaway inflation, it is almost completely uncorrelated to actual drug prices. Yet Pharmacy Benefit Managers (PBMs) continue to rely on this irrational price index as the backbone of their contracts with benefit plan sponsors because it opens the door to unchecked profitability and keeps them from being accountable for actual drug costs.

Capital Rx is the only PBM in the industry that has ditched AWP in favor of what we believe is a more rational drug pricing system. Our company was founded on the principle that Nothing Is Sacred when it comes to the existing drug supply chain… put another way, we believe “That’s how it’s always been done” is often the worst rationale for continuing to do something.

With that mindset, we took a cold, hard look at AWP. Here’s what we figured out…

The Problems with AWP

No drug price list is perfect. But AWP is perhaps one of the most flawed and problematic of the bunch. It is the industry standard partly due to historical coincidence (“That’s how it’s always been done”), but the biggest reason it is so widely used is that it drives tremendous profit opportunities for the PBMs and other supply chain middlemen.

We are certainly not the first to raise concerns about AWP. Those who have been in the industry for more than a decade can vividly recall the spate of class-action lawsuits associated with this pricing benchmark. In 2006, multiple pharmaceutical manufacturers were accused of recklessly inflating AWP in their pursuit of profitability. A second lawsuit settled in 2008 exposed widespread fraud and collusion between drug wholesalers and the private companies that publish AWP. Hundreds of millions of dollars were paid out as part of the settlements. It was a messy time for the supply chain, to say the least.

Setting aside its sordid history, here are just a few of the present-day drawbacks associated with AWP:

Entrenched profiteers within the drug supply chain would have you believe that AWP is the only viable method for pricing drugs. Put simply, they are wrong. Capital Rx has over 62,000 pharmacies in our NADAC-based retail network, which proves the viability of a better reference price. So, what the heck is NADAC? Glad you asked.

NADAC: Not Perfect, but Definitely Better

As large PBMs continue to insist that AWP is the only way to do business with their employer clients, the industry has quietly been accommodating alternative pricing models within government programs for years. The vast majority of state Medicaid plans have already ditched AWP in favor of a more transparent “Medicaid Acquisition Cost” index called NADAC (National Average Drug Acquisition Cost). I’ll spare you all the geeky details about how NADAC is calculated (you can easily Google that). Instead, I’d like to highlight a few reasons that state programs have moved to this model, which are the same reasons that Capital Rx has adopted NADAC as our new standard for drug pricing.

Expanding upon What is NADAC & How Does It Differ From AWP?:

NADAC is by no means perfect. It is self-reported by pharmacies via a survey, so it’s an estimated “blended average” of actual drug costs, not a precise measure at the chain level. Also, a handful of drugs will not have an assigned NADAC price (usually <1% of a typical client’s utilization). But there are relatively easy workarounds for these issues. And while we hope and strive for a perfect model, we’ll take “way better” over the status quo any day.

I don’t blame you if your head is spinning a bit from all the acronyms and technical nuances. Drug pricing is complicated. But we have an opportunity to simplify it dramatically, and in doing so, we can eliminate the stealthy profiteering that occurs under AWP.

If you’re dealing with a PBM vendor opposed to changing the current flawed drug pricing system, it raises an obvious question: “Who stands to gain from keeping that system in place?”

CLICK HERE to get in touch and discuss how our NADAC-based Single-Ledger Model™ works and aligns with plan sponsors' goals.

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